How to Navigate Shifts in Online Education Investment Opportunities

“Investors are becoming more selective, focusing on segments that demonstrate strong value propositions and growth potential, rather than just broadly investing in the entire market. It’s no longer sufficient to throw money at any online education company; investors need to identify those with clear, measurable outcomes and the ability to adapt to rapidly changing technologies.”

Trace Urdan, Managing Director at Tyton Partners Investment Banking

The online education sector has witnessed a significant transformation, especially with the rise of artificial intelligence (AI) technologies like ChatGPT. Shares of two big online education stocks, Coursera and Chegg, tanked in April as students increasingly turn to AI tools. Even Duolingo is seeing red.

Major players like Pearson have exited the online program management game, and course provider 2U is questioning its future viability. AI is picking up speed everywhere, suggesting that the online education model may be resetting. Investors are now questioning the sustainability of previous online education models and seeking new opportunities.

Is confidence in previous online education models collapsing? What does this mean for online education investment opportunities? We spoke with Trace Urdan, managing director and education investments expert at Tyton Partners, to learn more about the online education investment landscape.

Trace Urdan, Managing Director at Tyton Partners Investment Banking

Trace Urdan is a managing director at Tyton Partners and has followed the global knowledge market for nearly 20 years.

He has spent much of his career as an equity research analyst covering the knowledge services sector, most recently as a managing director at Credit Suisse. Prior to working in the institutional investment industry, Trace was the CFO of the information, communications, and entertainment practice at KPMG Peat Marwick. Before that, he held several senior management positions within TIME Inc. Asia in Hong Kong.

Urdan is primarily focused on developing new relationships in support of the Firm’s banking and consulting practices and extending its sector thought leadership through various research, publishing, and presenting initiatives. He is based in San Francisco, CA.

During his career, Urdan has followed many companies serving the education market, including early childhood, K-12, higher education, and employment training. He is widely cited as an expert on the topics of for-profit education, education technology, and education policy. He has been cited by Career College Central magazine as one of the 25 most influential people in the career college sector, testified before the Spellings Commission on the Future of Higher Education, and authored a white paper for the Kauffman Foundation on the topic of higher education regulation.

Urdan received a BA degree from Yale University and an MBA from Harvard Business School.

The sentiment in the online education investment market has grown increasingly cautious. Industry expert Trace Urdan said, “Investors are much more cautious now than they were immediately after the pandemic when they couldn’t get enough of anything related to online education.” This caution stems from several factors, including market saturation and rising costs for student acquisition.

Market saturation is particularly evident in the online Master’s programs, where the pool of interested students has narrowed. “The number of people interested in online master’s programs has significantly decreased,” Urdan noted. Additionally, the economic environment has made discretionary spending on education more selective. “People are more careful about funding their education directly when not using federal student loans, leading to slower growth in enrollment,” he added.

Moreover, the landscape of online education is diversifying. While some segments, like online master’s programs, face saturation and increased competition, others, such as alternative credentials and corporate training, exhibit different dynamics. For instance, the demand for alternative credentials offered by platforms like Coursera has been impacted by economic uncertainties and the rapid advancement of AI technologies. This varied landscape requires investors to be more discerning and strategic in their investment choices.

“Investors are becoming more selective, focusing on segments that demonstrate strong value propositions and growth potential,” Urdan explained. This shift in investor behavior underscores the need for a deeper understanding of the various segments within the online education market and the factors driving their performance.

One of the most significant disruptors in the online education market is the rapid advancement of AI technologies. Generative AI, like ChatGPT, has dramatically altered the software coding landscape. “The onset of generative AI has changed the software coding landscape pretty dramatically,” Urdan explained. This shift has caused potential students to reevaluate the value of traditional coding boot camps and alternative credential programs.

AI’s influence extends beyond software coding. In the tutoring space, AI-based solutions offer cheaper alternatives to traditional services, impacting companies like Chegg. Despite being potentially inferior, these AI solutions are gaining traction due to their cost-effectiveness. “AI as an alternative to traditional tutoring has come on strong, impacting the market significantly,” Urdan added.

The rapid integration of AI has also affected the curriculum offered by many alternative credential providers. As AI technologies continue to evolve, the lag in curriculum updates has made some educational offerings seem outdated. This delay has led to decreased enrollment as prospective students seek more relevant and up-to-date training options.

In the broader context, AI’s capabilities in personalized learning and adaptive education reshape how education is delivered and consumed. Institutions and providers that can effectively integrate AI into their offerings stand to benefit significantly. Urdan finds there is significant potential for AI to enhance both instructional and administrative processes in education.

The ongoing advancements in AI and other emerging technologies signal a need for education providers to stay agile and adaptive. Investors, therefore, need to closely monitor how these technologies are being integrated and their impact on different segments of the education market. Urdan emphasized that companies leveraging AI to improve educational offerings and reduce costs will likely emerge as leaders in this evolving landscape.

Different segments of the online education market face unique challenges and opportunities. For example, the online master’s programs have reached a point of market saturation, with fewer students entering these programs and higher costs associated with acquiring them. However, opportunities remain robust in other areas, particularly healthcare education.

“Healthcare education has been really consistent and strong,” noted Urdan, citing demographic trends and the increasing responsibilities of nurses and technicians as driving factors. The demand for trained medical professionals is expected to rise, providing a stable market for online healthcare education programs. The tailwinds in this sector are largely demographic, with an increasing need for healthcare professionals as the population ages.

The BA completion programs also show promise, especially for large and reputable brands like Southern New Hampshire University and the University of Phoenix. “There’s continued strength in BA completion programs, with respectable growth despite not matching their previous heyday,” Urdan highlighted. These programs cater to adult learners and working professionals looking to complete their degrees, offering flexibility and accessibility that traditional on-campus programs cannot match.

In addition to healthcare and BA completion programs, AI integration presents significant opportunities for growth. AI can be used to streamline administrative tasks, personalize learning experiences, and reduce instructional costs. “AI has applications in teaching and learning that need to be worked out, as well as in administration, which can bring down the cost of delivering education,” Urdan noted. By effectively integrating AI, education providers can enhance their offerings and attract more students.

Moreover, the demand for corporate training and reskilling programs continues to grow. As companies look to upskill their workforce to keep pace with technological advancements, online education providers have a unique opportunity to offer targeted and relevant training programs. “Nobody wants to be classroom-based anymore because of the economic benefits of being able to deliver something online,” Urdan observed. This trend underscores the importance of flexibility and innovation in educational offerings.

The trend towards online instruction is clear and reflects a broader shift in the education market. “The verdict is in: online is the future,” emphasized Urdan. This modality is preferred across various segments, from corporate training to certification programs. The economic benefits of online delivery, combined with the preference of students to consume learning in this format, solidify its place in the future of education.

Even in tutoring, where in-person options still hold value, the online model continues to dominate. Businesses like Sylvan Learning, which offer both ground-based and online options, still see strong arguments for maintaining physical locations. However, the prevailing trend leans heavily towards online solutions. “In tutoring, AI-based alternatives are making a strong case due to their cost-effectiveness,” Urdan noted.

The overall shift towards online education is driven by several factors. Students prefer the flexibility and accessibility of online learning, while institutions benefit from reduced costs and the ability to reach a wider audience. “The economic benefits of delivering education online are compelling for both providers and students,” Urdan pointed out.

This broader trend towards online education is not just limited to the US market. Globally, there is an increasing demand for online education solutions, particularly in regions with large and young populations.

“The need for education in the global south is enormous, and online delivery is likely the most effective way to meet this demand. Finding ways to serve the educational needs in these regions cost-effectively is almost inevitable,” Urdan observed.

The global South presents vast opportunities for online education providers. With young and large populations in need of training across all educational levels, the demand is enormous.

US providers, already advanced in online education, are well-positioned to tap into this demand. Whether through degree programs or alternative training offerings, the potential for growth in these markets is significant. “We are still in the early innings of figuring out the global south,” Urdan remarked, indicating the untapped potential in these regions.

Countries in the global south, particularly in Africa and South Asia, have burgeoning populations that require access to quality education. Online education can bridge the gap, providing scalable and flexible solutions to meet diverse educational needs. “There are significant opportunities to expand market share and realize growth by addressing the educational needs of these regions,” Urdan added.

Understanding the unique challenges and opportunities in these global markets is crucial for investors. This includes recognizing each region’s infrastructure limitations, cultural differences, and specific educational needs. By doing so, investors can identify the most promising opportunities and support the growth of online education in these underserved markets.

First and foremost, investors looking to enter the online education market must understand the value proposition in the labor market.

“If the program offering drives an outcome that can be measured and confidently achieved, it will always be valuable,” Urdan advised. This is particularly true for training that aligns with growing employment sectors.

With this in mind, understanding the total addressable market and competitive dynamics is crucial. For example, as discussed, the online master’s program market has slowed, but companies that can pivot and leverage their skills in new ways will find opportunities. Helping institutions navigate technology to deliver learning more broadly remains a worthwhile investment Urdan suggested as one opportunity.

Investors should also focus on companies that can adapt to technological advancements, particularly AI. “The companies that can leverage AI to improve their educational offerings and reduce costs will likely emerge as leaders in this evolving landscape,” Urdan emphasized.

When evaluating potential investments, investors should focus on growth in specific segments, technological integration, and market share potential. “It’s about picking winners within the market rather than just investing broadly,” Urdan noted. Assessing a company’s vision and strategy for leveraging technology to address market needs is essential.

Key indicators include enrollment growth, student acquisition costs, and the integration of AI and other emerging technologies. Investors must also consider a company’s ability to adapt to changing market dynamics and technological advancements.

The online education investment market is evolving, influenced by technological advancements and shifting economic conditions. While challenges exist, particularly in saturated segments, significant opportunities remain in healthcare education, BA completion programs, and global markets. Investors must stay informed about technological trends and market dynamics to navigate this landscape effectively.

Ultimately, the need for education is undiminished, and the modality of delivering it online remains strong. By focusing on value-driven programs, understanding market segments, and leveraging technology, investors can position themselves for success in the shifting online education market.